Problem:
A commercial bank has $200 million of floating-rate loans yielding the T-bill rate plus 2 percent. These loans are financed with $200 million of fixed-rate deposits costing 9 percent. A savings bank has $200 million of mortgages with a fixed rate of 13 percent. They are financed with $200 million in CDs with a variable rate of T-bill rate plus 3 percent.
a. Discuss the type of interest rate risk each institution faces.
b. Propose a swap that would result in each institution having the same type of asset and liability cash flows.
c. Show that this swap would be acceptable to both parties
Please show work.